Kenny is only twenty. After two years looking he has managed to get a job. He works 60 hours a week in a bar. They are keeping him on and he is getting a raise. In an economy where kids just can’t find work he is someone who deserves all the support we can give, yet when I see him as Duty Solicitor he is in rent arrears and risks losing his home.

It turns out that when he finally got the job he took a small pay day loan to celebrate and thank his parents for supporting him. Then, when he had to repay the loan, which had an apr of 200% he had no money left from his wages, and had to take another loan. Soon all his money was going to shady companies whose dodgy representatives door-stepped him and even his parents. He looks haunted.

Kevin is a pensioner, living with his adult son. Because his son works in a shop and earns reasonable wages Kevin gets little in Housing Benefit – the son is expected to contribute the rest in a part of the regulations known as a non dependant deduction.

Yet Kenny is in rent arrears that climb steadily. He too may be evicted. His son too has taken out pay day loans, and finds his income being hoovered up by the lender. The son is terrified of taking time off work to get debt advice in case he is fired. In any event the queues at the local CAB are round the block.

Kyle is a postman separated from the mother of his six year old daughter. Over the summer his kid started to visit more regularly and he took out a small pay day loan so he could give her a few treats. It looks to me as if he is trying to make sure his relationship with his daughter does not suffer because of differences with her mother, he’s trying to do the right thing as a responsible dad.

You guessed it. He’s in rent arrears too.

Perhaps 1/50 or 1/60 of the clients that I now see as a duty solicitor are in thrall to brutal lending companies which may be called Wronger, or Conga or what have you. These are working class people in social housing with modest salaries who literally can’t put food on their table because of punitive rates of interest on pay day loans. These are far more deadly than crack; a small taster is enough to hook you for life.

Back in Law School they taught us that there were rules about usury, and the legislation then in place was enough to crack down on most of the unlicensed loan sharks that we saw in the 60’s and 70’s. Today, if you look around your high street, you will see that pay day loan companies are a growth industry, popping up like barnacles alongside betting shops- that other modern mecca to despair. They will tell you that what they are doing is selling services specifically designed for very short periods- yet perhaps half of their income comes from repeat borrowers.

Far from being curbed by the existing legal machinery, we see that Newcastle football club has looked at putting a pay day loan company on their shirts. The dodgy criminal with a cosh in his pocket of old has undergone an alchemical change, and acquired a glossy corporate face and sugared words that hide pure poison.

Standing up in court I tell the District Judge the plain facts. How wages meant for rent and other essentials evaporate the moment they arrive. In every case we get an adjournment so that the tenant can get debt advice.

Yet if I have managed to achieve something today, tomorrow paints a bleaker picture.

Firstly, although Legal Aid presently funds debt advice, from April 2013 this will be so scarce as to be non- existent. For every 100 housing cases funded by Legal Aid, the government is awarding 4 debt cases. We will be hamstrung before we even start.

Secondly, alternative sources of credit for people on benefits or low incomes will become almost non-existent. The Government Social Fund which used to provide cheap loans and grants will soon disappear, and Credit Unions are shutting up shop all over the country.

While the Bank of England’s interest rates are as low as at any time since its foundation, corporate sharks are trawling the economy, and we see no sign that Government is prepared to use any of the levers available to it to stop this from happening.

As a child I was raised a Catholic, and I remember well the story of Jesus scourging the money lenders from the temple for the sin of usury. If I had been raised a Moslem the concept of any interest rate would have been anathema- far more so these new vampire squids that feed and feed and make corporate merchant bankers models of restraint and probity by comparison.

The truth is that anyone with a moral compass will recognise these greedy pay day loan companies as deeply wrong. Why can’t we do something to stop them.

Reader comments

I suspect the only coherent answer is to ban short term loans and do your best to police illegal loan sharks, and hope that works out better than what we currently have.

You focus on penal interest rates. Suppose a short term loan company was run by a not for profit that merely wished to cover its costs. Each branch has some overheads, staff, and a cost of funds and will make a certain mumber of loans that wil not be repaid. Each branch has a certain number of customers, from whom to these cover costs, who borrow a smallish amount each month. My guess is that if you sat down and tried to estimate the interest rate you’d have to chaste you’d be north of 100% APR. in fact with all these entrants like Wonga into the pay day loan market, it might even be the case that the rates they charge aren’t far from what a hypothetical not for profit would charge, by which I mean that if rates did come down to this hypothetical minimum, the APRs would still not be anywhere near low enough to avoid people like those in the OP getting in serious shit if they take out loans they can’t repay.

So I think focussing to on the rates is the wrong approach, you’ll not get them much lower by trying to make payday loan companies less greedy, small short term loans are an inherently high rate affair, if you don’t like it, just ban it.

Interest rates reflect both the price of money and the risk of default. Pay day loans are often taken up by people who have insecure, low paid work. People who often would not be able to access traditional forms of lower interest credit like overdrafts. The business models used by the loan company will reflect the the fact that x percent of loanees won’t repay, hence the rate they need to charge the ones that will, needs to be higher to cover them.
Realistically you cannot ban short term loans (however you define “short term” it would include all sorts of financing which most people use), or “high” interest rates (define high). One solution might be the more widespread use of credit unions – they are talked about a lot but never seem to gain critical mass – as community based forms of credit. The other would be better financial education of the population, many people don’t even know what APR stands for let alone what it means.

Pay-day loan businesses and usury are only part of a larger problem. In the last few days, the press has been carrying stark warnings about the urgent need to bring the “shadow banking” system within the scope of formal financial services regulation to maintain financial stability. For one, try this from Reuters:

Kenny’s 60 hours a week, even assuming min wage with no tips, is gbp360 a week. A loan of 500 quid at 200pc annual interest (which is not the same as 200pc APR, as APR annualises setup fees) would incur interest of gbp30 a week, plus gbp15 if paying back the principale over a year. This is all listed in the documentation when the loan is taken out.

Kyle has a responsible stable job, why the buggery doesn’t he get an overdraft or a credit card? Even without much of a credit history, the APR would be under 20pc.

Kevin should tell his son to sod off if he “can’t” chip in for the rent, and go back on HB.

Payday loans are for people at immense risk of not being able to(/choosing not to) pay back the money they borrow. That’s why they exist, and why their rates are so high – you’re paying 100pc interest on top of fees because there’s a 50pc chance you’ll not pay them back. My accounting course featured subprime loan companies as case studies, the profits they make are small at best (one of the companies we studied went bust not long after for grossly underestimating default rates – ie not charging high enough interest).

The problem isn’t with the loan companies, who provide an incredibly valuable service to people who need it (not these case studies, but people who actually have no access to short term cash and need it for essentials). It’s with a culture of financial illiteracy – see above – and mindless consumerism (being a good dad involves taking out debt you can’t repay to buy tat? Really? How about going to the park?). Laws that ban regulated companies from the business will do nothing to change that culture, but will mean the lending niche is filled by Ronnie & Reggie Associates.

(fun fact: if I lend you gbp100 for a week and you buy me a pint in return, that’s 200pc APR)

“Kyle has a responsible stable job, why the buggery doesn’t he get an overdraft or a credit card?”

The sad fact is that some folk aren’t too bright and that guy from the pay-day loan company was probably ever so nice and helpful about getting that loan quickly and with no trouble.

Practically every week, my local press reports another case of some pensioner being ripped off – often to the tune of thousands – by some con artist and the victims in those cases have had lots of experience of life.

Their trouble is that they are too trusting and can’t believe some other, apparently nice people could have evil, self-serving intentions.

Recap that our high street banks are paying back billions to their depositors for mis-selling Private Proetction Insurance (PPI) and also hundreds of millions for mis-selling interest rate hedges to small and medium sized business customers and agreed to compensate them as well.

I’m being plagued by telephone scammers so I recently did a web search only to discover that many have been going with the same scam for years. The obvious question is why haven’t the telephone operators got together to block the scammers?

Aren’t there local Citizens’ Advice Bureau offices for advice on whether pay-day loans are a rip off?

Pay day loans, and the damage they help cause, are but a symptom of the underlying cause – the poor have fuck all money, including those that do all that ‘work honest and hard and you’ll get ahead’ bollocks. Meanwhile mainstream rhetoric demands that the poor be sanctioned and their lives made miserable in order to make them work harder and contribute, while the rich are given tax breaks, incentives and bonuses in order to make them work harder and contribute.

As it is our ever benificent government that has forced some of us, me included, into taking a ‘pay day loan’ perhaps they could provide the same at 0% interest, as it is they that have made us need this sort of support?

Weak, ignorant – even stupid – people exist. So the orthopaedic chair salesman who sits for six hours in your frail old nan’s house until she’s parted with all the money she has had it coming, did she? The salesman was just doing his job, and your nan was a total mug and deserved to be exploited?

High interest loan companies prey on the weak, ignorant and stupid, as only sharks, shysters, fraudsters and thieves would do.

sigil: in the cases here, the payday loan companies have sold to: a young man who just got a job and wanted to splash a bit of cash (completely legit – if you’re earning, you deserve a blowout first, but check you can meet the payments first…); a young man in the same position, who’s willing to screw over his vulnerable old dad; and a youngish father who holds down a serious and responsible job.

Yes, if they start robbing poor blind Auntie Maud, then hang them. But none of the above are anything like that at all. Two are responsible, not-vulnerable-in-any-sense adults who should know better being silly; and one is a vulnerable adult risking everything after being screwed over by someone who he depended on.

Pay day loans, and the damage they help cause, are but a symptom of the underlying cause – the poor have fuck all money, including those that do all that ‘work honest and hard and you’ll get ahead’ bollocks.

Yes, largely due to the collapse of unionisation.

Meanwhile mainstream rhetoric demands that the poor be sanctioned and their lives made miserable in order to make them work harder and contribute, while the rich are given tax breaks, incentives and bonuses in order to make them work harder and contribute.

Mainstream rhetoric demands that the working poor be punished and have their lives made miserable? As far as I can see, that’s toss.

Mainstream rhetoric, which is driven primarily by people on the lower-income-working side of the equation, scourges people who don’t have jobs, painting them as fake-disabled, scroungers, single mum parasites, and all the rest. Whilst elevating the working poor (certainly when indigenous) to heroic status.

Labour spent 15 years trying – with moderate success – to make the working poor better off whilst not totally screwing over the poor who can’t work (which is an immensely difficult balance, for obvious marginal-tax related reasons). The Tories are nominally trying the same thing, albeit in worse faith and with far more demonising of the non-working poor.

You know this is a serious issue somewhat spoiled by the article reading like one of those columns that appear in the Independent full of made up people.

” Back in Law School they taught us that there were rules about usury, and the legislation then in place was enough to crack down on most of the unlicensed loan sharks that we saw in the 60’s and 70’s ”

The English usury laws were repealed in 1854. Usury in the original legal definition was any interest rate. Later it came to mean any interest rate above the maximum ceiling permitted by law. It never meant an interest rate that I disagree with. Unlicensed loan sharks would be covered under the criminal law and I doubt anything has changed legal status wise since the 60’s to change that.

“…alongside betting shops- that other modern mecca to despair. ”

Some people would say the same about lawyers offices. I know who sends me the most bills.

” Standing up in court I tell the District Judge the plain facts. ”

Courts will and have disallowed contracts as being unfair if interest rates are considered excessive. Since you have not argued that your clients contract was unfair one can only conclude that you do not believe the contract is unfair. Yet that is what you imply on here.

“…Credit Unions are shutting up shop all over the country.”

Some numbers for the amount of people using credit unions would be useful. Is it going up or down? Just looking at totals of credit unions would not tell us that. For example, if one credit union with 1000 members closed and another increased their membership by 2000, we could hardly say the use of credit unions was going down. Moreover, this article in the Guardian about credit unions was interesting.http://www.guardian.co.uk/money/2012/may/10/credit-unions-must-raise-interest-rates-says-report

It appears the problem is the ceiling that caps the interest rate that they can charge is the problem and why some are ” financially unsustainable”. Kinda the opposite of what you are arguing.

” As a child I was raised a Catholic, and I remember well the story of Jesus scourging the money lenders from the temple for the sin of usury. ”

You don’t remember it that well. It was the money changers. A kind of early anti-travelex movement.

“If I had been raised a Moslem the concept of any interest rate would have been anathema-”

Islamic finance does charge interest but they just avoid calling it interest to make it compliant with their religion.

Look, I am sure you mean it with the best of intentions but clamping down on payday loan providers or legislating interest caps is merely dealing with the symptoms. Only the arithmetically challenged would go to such companies if they did not need to. Some people just have a poor credit history. Some people just have a poor risk profile. Some people as a consequence just have a high default risk. So of course anyone who lends them money is going to charge them a high interest rate to compensate for the default risk. In effect they are paying high interest rates to cover the other people who did not repay.

The way to deal with the issue is not through demonising these companies but by putting them out of business by building better alternatives. I did not know the government are abolishing the social security social fund. That seems a backward step to me as I would imagine they probably recover all the money they lend so abolishing it does not make a whole load of sense. There is huge scope for the growth of credit unions in the UK compared to how prevalent they are in other comparable countries. Growing credit unions and encouraging employers to offer crisis loans to their employees will achieve more than demonisation. Poor risks seeking credit will not go away even if we abolished every sub-prime lender today.

“What is the APR on an unauthorised overdraft of say £50 from a major high street bank? Work it out, and you’ll see why payday loan companies are cheaper than the alternative.”

Aren’t they in the range of 20%? I know that charges can mean you effectively pay way over the odds for a small withdrawal, but they don’t tend to spiral quite as badly, even back when it was the norm to hit people with an automatic charge of £30+ for each overdraft withdrawal, mainly because they’re flat fees – what makes them seem so austere for minor debts is the same thing that makes them manageable for larger debts.

Don’t get me wrong, I used to work for a bank and spoke to people who were clearly being badly affected because they could barely afford to pay off the charges each month. But they were capped, and if that bank was typical then I doubt they’re as bad as payday loans. I’ve heard of people taking out a loan for a few hundred pounds and ending up with five-figure debts.

8: “Meanwhile mainstream rhetoric demands that the poor be sanctioned and their lives made miserable in order to make them work harder and contribute, while the rich are given tax breaks, incentives and bonuses in order to make them work harder and contribute.”

Has nothing has changed since that old music hall ditty? Try today’s Independent:

“The Department for Business is to sweep away a 141-year-old law, the Pedlars Act, under which street traders and door-to-door salespeople – currently numbering around 4,000 in the UK – are required to register with the police. Once they have proved they are of ‘good character’, they are given a licence to trade for a year, costing £12.50”

I’ve a small, plain notice showing besides my front door. It reads: “We do not buy goods or services from sales people at the door. Pleaes do not call at this address.”

Logos show the sponsors of the notice: the local borough council and the Metropolitan Police.

“What is the APR on an unauthorised overdraft of say £50 from a major high street bank? Work it out, and you’ll see why payday loan companies are cheaper than the alternative.”

Aren’t they in the range of 20%? I know that charges can mean you effectively pay way over the odds for a small withdrawal, but they don’t tend to spiral quite as badly, even back when it was the norm to hit people with an automatic charge of £30+ for each overdraft withdrawal, mainly because they’re flat fees – what makes them seem so austere for minor debts is the same thing that makes them manageable for larger debts.

On an unarranged overdraft of £100 for a month at RBS, you’d pay daily fees of £6.

OK, that’s worse than I thought. Although my point stands about them being flat fees.

Even if the overdraft is £4-500 (the maximum that the larger payday loan companies are generally prepared to lend), the unauthorised overdraft is more expensive than the payday loan company. Try a couple of sets of sliders:

APR is Annual Percentage Rate and not the interest on a loan. APR is designed for long term loans such as mortgages, not for loans designed to be paid back within weeks or months. The key word is ANNUAL. Short period loans will have very high APR rates because APR does not work for them. Don’t use these extortionately high APRs and say that they are the interest for the loan, they aren’t. Actual monthly interest rates for short period loans will be more in the region of 30-70%. An APR of 22000% is a monthly interest rate of 56.81%

I charge you 20% annual interest, which works out as gbp1.67 for the month.

But because the whole payday loan setup costs me shedloads, with the cost incurred per loan not per pound lent out, I also charge you a gbp25 upfront admin fee, which is included in the total loan amount and has interest calculated on it as well.

Hence, your payment in a month’s time is gbp127.08. Which means that your APR, which is calculated on the basis that whatever you’ve paid over the period you’ve paid for is multiplied out to a year, rather than on what you’d actually pay if you borrowed for a year, is 325%.

If you borrowed on the same terms – gbp100 with a gbp25 upfront fee at 20% interest – but for a year, your APR would be 65%. And if you borrowed gbp1000 for a year at 20% interest with a gbp25 upfront fee, your APR would be 25%.

APRs are broadly sensible; without them, companies would disguise interest as fees in order to sell low-headline-interest-rate loans to idiots. However, the fact that there are fixed per-transaction costs will inherently make low-volume short-term lending sound like larceny, by the very way the rules are defined.

1) their APR – which as others have pointed out, given the companies overheads etc., is not all that excessive, though still high enough to exacerbate the cycle of poverty that many who take out such loans find themselves in; earning an extra twenty quid a week can in this context make all the difference.

2) the targeting of vulnerable people by these companies – a despicable practice which I suspect is quite widespread and resembles any other form of sales (i.e. seller given bonuses for X number of new sales, encouraged to target the elderly, given scripts that are carefully edited so as to not give the customer all the relevant information yet also so as to not fall foul of trading standards, etc.)

In any case, the way to resolve both these issues surely involves a mixture of better wages, stricter regulation of the financial sector, credit unions (or other institutions that can lend at a cheaper rate) and better financial literacy. Unfortunately the first three require a great deal of political will, while the last-mentioned would doubtless culminate in a largely ignored government campaign which nevertheless offensively depicts people as feckless morons who can’t even manage basic arithmetic.

In other words, payday loans are here to stay, so do your best to avoid getting shafted by one!

@27. jojo: “Payday loans are just an extention of the credit culture which has been with us for at least 20years.”

Payday loans have been around for 3,000 years or so. In the time of our grandparents, the Sunday best suit occasionally went to the pawn shop on Monday and was redeemed at Saturday noon when the week’s pay packet was opened.

@ 22 I can’t be bothered to fully explain APR but there are different ways of calculating it. Say you had an APR of 10% on a £100 loan without any fees. The same loan with a £10 admin fee would be 10% + (10/100) = 20% with the fee included. My argument would be that fees are just disguised interest, and should be treated as such. It also makes comparing credit, where there are different combinations of interest and fees, easier

Ah, so the problem there seems to be that the flat fee is included in the loan amount, rather than added as a standalone charge at the point of repayment. Which, IIRC, was one of the endemic problems with PPI (specifically that this often wasn’t made clear to customers at the point of sale; the other issue was that people were given the impression or flat-out told that they would be refused their mortgage if they didn’t take the insurance).

It’s not a rule just because someone says it. It’s especially not a rule when the person who says it is a comedic character in a Shakepeare play, a rambling old man giving out reams of unwanted and thoughtless advice.

How much delayed gratification, exactly, do you think I and a partner would have to go through before we could buy a house outright, bearing in mind that we’d be renting all that time?

Ah, so the problem there seems to be that the flat fee is included in the loan amount, rather than added as a standalone charge at the point of repayment.

Not quite. The APR is calculated not on the apportioned interest rate, but the “total charge for credit”. That includes interest, arrangement fees etc etc. The admin fee would be included in the APR calculation whether paid at the beginning or end. It bore interest, in john b’s example, because the costs were incurred by john b’s hypothetical payday loan company at the commencement of the loan, not at its end.

The point he is making is correct; it costs as much to set up and do a credit check for a one month loan for £100 as for a 3 year loan for £1,000. If you are seeking to recoup the costs from the borrower – and you will, because nobody lends at a loss – you only have one month’s interest payments to recoup them from, rather than 36. Your total charge for credit will reflect that fact, making the APR look ludicrous.

How the RBS justify their £6 fee a day is up to them – but they don’t incur setup or credit check costs on an unauthorised overdraft…

I’m surprised that RBS uses those charges. I was under the impression that banks are trying to make their processes seem more reasonable to avoid consumer backlash and prepare for legislation.

For example, my bank has gone from hitting you for £30 each time you withdraw over your limit (max three times monthly) to putting you into a “reserve” for a week or so with a charge of, I think, £22. Not a lot less, but you wouldn’t get charged three times for making three withdrawals that week, and the reserve charge doesn’t come out till you have enough credit.